Question 1

A business which exists in fact although not formally recognized is referred to as being:

Accepted Answer

"De facto" refers to a situation that exists in reality or fact, regardless of whether it is formally recognized by law or society. It is often used to describe a situation where a business is operating without proper legal recognition or documentation. "De jure" refers to a situation that is formally recognized by law or society. "De minimus" refers to something that is considered trivial or insignificant. "De legal" is not a commonly used term or phrase.

Question 2

A partnership is considered fully terminated:

Accepted Answer

A partnership is considered fully terminated after the winding up process is completed, which involves liquidating the assets, paying off debts, and distributing the remaining profits among the partners. Dissociation and filing of termination certificates do not necessarily signal the completion of winding up and the termination of the partnership.

Question 3

Stan and Frank have started a general partnership.Stan has contributed 95% of the startup capital and has the business experience and contacts while Frank's primary contribution is labor necessary to operate the business.Management decisions are jointly made.At the end of the year,the business has shown a $100,000 profit.They have no formal written partnership agreement.

Accepted Answer

In the absence of a written agreement, the Revised Uniform Partnership Act (RUPA) states that profits are to be divided equally among partners, regardless of capital contribution or labor.

Question 4

Jonathan has graduated and wants to start a business.Which business entity gives him the most complete and exclusive control over the business and any business decisions?

Accepted Answer

A sole proprietorship gives Jonathan complete control over the business and all business decisions. As the sole owner, he can make decisions without having to consult with partners or shareholders. However, he also assumes all legal and financial liability for the business, which is important to consider.

Question 5

Redrock GP has decided to go out of business.The sale of the partnership assets and the making of payments to creditors will occur during the ________ phase of the closing of a partnership.

Accepted Answer

According to partnership law, when a partnership decides to go out of business, they must first go through the process of dissolution, which involves ending the partnership agreement and dividing the partnership assets. After dissolution, the partnership enters the winding up phase, where the partnership assets are collected, liquidated, and used to pay off outstanding debts to creditors. Finally, after all the debts have been satisfied, the partnership enters the termination phase, where the remaining assets are distributed among the partners. In this case, since Redrock GP has already decided to go out of business, they would be in the winding up phase where they would sell off their assets and make payments to creditors. Therefore, the best choice is C.

Question 6

Which of the following requires a formal filing to be recognized as a valid business entity?

Accepted Answer

A limited partnership requires a formal filing with the state in which it is established in order to be recognized as a valid business entity. Sole proprietorships and general partnerships do not require formal filings, though they may need to register for certain licenses or permits. Option D is incorrect as not all business entities require formal filing.

Question 7

Steve has opened a sole proprietorship bicycle shop.The business shows a net income of $100,000.Steve took a salary of $40,000.The remaining money is left in the bank.

Accepted Answer

In a sole proprietorship, the owner pays personal income tax on the net income of the business. Steve's salary is part of the net income, so he pays taxes on the total $140,000.

Question 8

Harry wants to start a personal training business.He should choose a sole proprietorship entity if:

Accepted Answer

A sole proprietorship is simple to manage, with the owner having full control, thus avoiding management conflicts.

Question 9

Frank and Jesse are operating as a general partnership.A question has arisen not covered under their partnership agreement and also not addressed by the Revised Uniform Partnership Act.What will the courts do to resolve the situation?

Accepted Answer

When a situation arises that is not covered by the partnership agreement or by the governing statute, the courts will look to the common law principles of partnership law to determine the appropriate resolution. The common law principles consist of a body of legal precedents established by court decisions over time.

Question 10

With regard to taxation of partnerships:

Accepted Answer

Partnerships are not taxed as entities separate from their owners. Instead, they are "flow-through" entities, meaning that partnership income is allocated among the partners and taxed on their individual tax returns. However, partnerships must still file an information return (Form 1065) with the IRS and relevant state tax authorities. The partnership itself does not pay taxes on its income, but rather the partners do so on their individual returns.

Question 11

Regarding limited partners:

Accepted Answer

Limited partners may not withdraw before the time that the partners have agreed that the partnership will terminate, as stated in the partnership agreement.

Question 12

A disadvantage of the sole proprietorship is:

Accepted Answer

The unlimited liability of the principal in a sole proprietorship means that the owner's personal assets are at risk if the business incurs any debts or legal liabilities. This can be a significant disadvantage as it puts the owner in a vulnerable financial position. The other options are not disadvantages of sole proprietorships - A is relatively easy to form, B allows for a lot of flexibility in management, and D does not apply to sole proprietorships as they are not separate legal entities from their owners.

Question 13

The Revised Uniform Partnership Act mandates that with regard to partnership debts and liabilities,general partners are:

Accepted Answer

Under the Revised Uniform Partnership Act, general partners are personally liable for the partnership's debts and liabilities. This means that they are jointly and severally liable, which means that each partner can be held liable for the entire debt or liability if the other partners are unable to pay their share. Option A and D are incorrect because general partners are personally liable for debts and liabilities. Option B is incorrect because the liability is joint and several, not just joint.

Question 14

In a general partnership:

Accepted Answer

The answer of In a general partnership:
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Question 15

Lisa and Tara are operating a business as a general partnership without an express partnership agreement.Should a dispute arise,the courts will look to ________ to resolve the issue regarding operation of the partnership.

Accepted Answer

The Revised Uniform Partnership Act (RUPA) provides default rules for partnerships in the absence of an express agreement.

Question 16

Bob,Carol and Ted have decided to go into businesses as a limited partnership importing and selling exotic spices.Bob and Carol will manage the business and Ted will have no role in the day to day operations.Bob and Carol contributed have each invested $500,000 and Ted has contributed the building and land that the business will be operated from.Alice,a customer,contracts a rare disease from a contaminated spice sold by the company and sues.Alice is awarded a judgment for $5 million.After she exhausts the assets of the partnership,having the property and building sold and seizing all other property,$3 million remains unpaid.

Accepted Answer

As a limited partnership, all partners are jointly and severally liable for the debts and obligations of the partnership. In this case, the judgment awarded to Alice was a debt of the partnership, and after the assets of the partnership were exhausted, there was still $3 million outstanding. Therefore, Bob and Carol each owe $3 million jointly and severally, meaning that Alice can sue one or both of them for the entire $3 million balance. Ted, as a partner with no role in the day to day operations, has no additional liability beyond his contribution of the building and land.

Question 17

Mike lends money to Kathy as a business loan to Kathy who is capitalizing her start up sole proprietorship named Kathy's Things.If Mike must sue for repayment,he would sue:

Accepted Answer

The loan was given to Kathy as an individual to capitalize her sole proprietorship. Therefore, if Mike must sue for repayment, he would sue Kathy as an individual, rather than Kathy's Things as a separate legal entity.

Question 18

Which of the following is not an option available to a general partnership seeking capitalization?

Accepted Answer

Selling ownership rights through the public markets is not an option available to a general partnership seeking capitalization. This is because a general partnership is not a separate legal entity from its partners and does not have shares that can be publicly traded.

Question 19

A limited partnership requires:

Accepted Answer

A limited partnership requires at least one general partner and one limited partner. The general partner has unlimited liability, while the liability of limited partners is limited to the amount of their investment. A written limited partnership agreement is generally recommended, but not required by law.

Question 20

Dissolving a limited partnership requires:

Accepted Answer

Dissolving a limited partnership requires a unanimous vote of the general partners and consent of any limited partner who owns a majority of the rights to receive a distribution as a limited partner. This means that the general partners must agree to dissolve the partnership, and the consent of the limited partner who has the most to lose financially must also be obtained. This ensures that the dissolution is fair and equitable to all partners involved.

Quiz 13: Choice of Business Entity, Sole Proprietorships, and Partnerships